Inflation, as measured by the producer price index, rose three-tenths of a percentage point to 3.3% for the year ending in December, hinting that the economy may not yet have vanquished price pressures.
On a month-to-month basis, the price index increased by 0.2%, the Bureau of Labor Statistics reported on Tuesday. Core PPI, which strips out things like food and energy, rose 3.5%.
The price increases were less than investors expected but still large enough to signal a lingering inflationary problem to worry the incoming Trump administration and the Federal Reserve.
Economists from High Frequency Economics wrote Tuesday morning that the report would not give the central bank confidence to lower its interest rate target faster. Some in markets have increasingly worried that the Fed may have to keep interest rates restrictively high for longer this year to ensure inflation continues to fall and doesn’t start to crop back up.
The producer price index report “is not necessarily what the Fed wants to see before easing monetary conditions into a fast-growing economy, with tariffs and tax cuts on the agenda of the incoming administration,” the High Frequency Economics economists wrote.
The most often cited inflation gauge for the public is the consumer price index. CPI inflation hit its lowest point in recent years in September but has since ticked up to 2.7% — showing that inflation is proving more stubborn than expected.
Aside from the CPI, the Fed looks at another inflation gauge, the personal consumption expenditures index, when analyzing its next steps. The PCE index also ticked up in the most recent reading, rising to 2.4% in November.
The Fed’s goal is 2% inflation, and after years of higher interest rates, the central bank has started reducing its rate target. But stickier inflation reports could cause the Fed to slow its efforts to lower rates.
The most recent jobs report bolstered perceptions that the Fed is going to hold off on cutting rates in the near term. That is because the report came in hotter than expected, meaning that the Fed has more leeway to hold rates higher because the jobs market isn’t starting to deteriorate.
The economy added 256,000 jobs in December, and the unemployment rate fell a tenth of a percentage point to 4.1%, the Bureau of Labor Statistics reported last week. Investors expected roughly 155,000 new jobs and the unemployment rate to remain at 4.2%.
Most investors don’t expect another interest rate to come until at least June or even as late as September, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
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Additionally, the tool implies there is about a 30% probability that the Fed won’t cut interest rates at all in 2025 — keeping the target rate at 4.25% to 4.50% through the end of the year.
The Fed will meet later this month to discuss interest rates and decide whether to hold rates steady or conduct a cut.
